What Is the Stock Buyback Accountability Act?
Understand the push to tax corporate stock buybacks, detailing how the tax is calculated and how current proposals compare to existing law.
A stock buyback, or share repurchase, occurs when a company buys its own shares from the marketplace. This action reduces the number of outstanding shares, which can affect a company’s financial statements and stock price. The Stock Buyback Accountability Act is a legislative proposal aimed at taxing these corporate repurchases. The core idea behind the act is to apply an excise tax to the value of stock a publicly traded corporation buys back, building upon an existing tax.
Connection to the Inflation Reduction Act
It is important to understand the relationship between the Stock Buyback Accountability Act proposals and existing law. A 1% excise tax on corporate stock buybacks was officially enacted as part of the Inflation Reduction Act of 2022. This provision, found in Internal Revenue Code Section 4501, made the concept of a buyback tax a reality.
The tax implemented by the Inflation Reduction Act imposes a 1% non-deductible excise tax on the fair market value of stock repurchased by publicly traded corporations. It also includes the same netting rule, where the tax base is reduced by the value of stock issued during the taxable year, including stock provided to employees.
The passage of this 1% tax has shifted the legislative conversation. Subsequent proposals, like the Stock Buyback Accountability Act of 2023, are no longer about introducing a new tax but about increasing the rate of the existing one, with a proposed rate of 4%. The existing law provides the foundational framework and rules for how such a tax operates.
The Proposed Excise Tax
The Stock Buyback Accountability Act proposes to increase the tax rate to 4%. This tax is levied directly on the corporation conducting the buyback, not on the shareholders who sell their stock back to the company. The tax is designed to be an additional cost for companies that choose to return capital to shareholders through this method.
The calculation of the tax base is a key feature of the law. The tax is not simply applied to the gross amount of stock repurchased. Instead, the tax base is the fair market value of the stock repurchased during a taxable year, reduced by the fair market value of any stock the corporation issues during that same year.
This “netting rule” means that if a company buys back $500 million of its stock but issues $100 million in new stock to employees or through public offerings, the tax would only apply to the net amount of $400 million. Stock issued as part of employee compensation plans would reduce the taxable amount of a buyback.
Covered and Exempt Transactions
The tax is designed to apply broadly to any acquisition of a corporation’s stock by the corporation itself. This includes common methods like open-market purchases, where a company buys its shares on a stock exchange, as well as direct tender offers to shareholders. The legislation also defines which transactions are exempt from this tax.
- Repurchases that are part of a tax-free reorganization. In these situations, the stock buyback is a component of a larger corporate restructuring, such as a merger or acquisition, and is not treated as a standalone distribution to shareholders.
- Stock repurchases where the shares are subsequently contributed to an employee stock ownership plan (ESOP) or a similar employee benefit plan. This provision avoids penalizing companies for using buybacks to fund employee retirement plans.
- Companies whose total annual repurchase value falls below a de minimis threshold, such as $1 million, to spare smaller companies from the tax.
- Regulated Investment Companies (RICs), more commonly known as mutual funds, and Real Estate Investment Trusts (REITs).
The exclusion for RICs and REITs is because their business models often involve the regular issuance and redemption of their own shares as part of their normal operations.
Corporate Reporting Obligations
The stock buyback tax requires specific reporting obligations for all publicly traded corporations. Companies must track and report data related to their stock transactions, including the total fair market value of all shares repurchased and the total fair market value of all shares issued within the same taxable year. This information is needed for calculating the net tax base.
These reporting duties are integrated into a corporation’s annual tax filing process with the Internal Revenue Service (IRS). Companies must disclose the number of shares involved, the dates of the transactions, and the fair market value used for the calculation.
The payment of the excise tax coincides with the corporation’s regular income tax payment schedule, meaning the liability is calculated for the full taxable year and paid as part of the company’s annual tax return. Failure to accurately report or pay the tax would subject the corporation to standard penalties and interest.